I am preparing my taxes and trying to figure out how much of the American Opportunity Act Credit I can put on my tax return. The 1098T says my son has about $1200 he has to put as income on his taxes. I can claim textbooks I paid for him on my taxes. This is fairly clear. But, I read on the IRS website and publication 8863 that the Pell grant can possibly
be declared as income on the dependent’s taxes and increase the parent’s tax credit. It says the Pell grant can be declared
for room and board as as long as it is treated as taxable income? I help pay for his room and board. He has quite a bit of income to declare before going over the taxable threshold. This all seems complex. Has anyone gone through this before?
I thought about just declaring the books, but wonder if I am not getting the full benefit of credits. Any information appreciated.
Read Publication 970. Yes, you can have the student include more of the grants/scholarships in income so that you have QEE of $4000 to include in the AOTC computation on Form 8863.
Yes, many here have done that. Be aware that depending on how much taxable scholarships and grants he has, it may trigger the kiddie tax, form 8615. Taxable grants and scholarships are unearned income for that purpose.
I read on another post to put scholarships under earned income on the students tax return. Is the kiddie tax for
other investments and dividends? He has about $2600 earned income and $1200 scholarships he has to declare, and an additional$2600 in Pell grants he can report as income to help my taxes, BUT if kiddie tax is involved I may not do this. I was under the impression the Pell grant can be applied as income. Any clarification appreciated.
Kiddie tax is involved since grants and scholarships are unearned income.
But kiddie tax is not a tax rate of 100% while the first $2000 of tuition paid is a 100% credit if conditions are met.
If your kiddie is getting a Pell grant then your tax rate is low - what is your concern? You could be throwing away almost free money of $2500 to avoid potential kiddie tax.
Wouldn’t the student’s standard deduction allow $6,900 of income before any is taxed? Or does that only apply to earned income?
Sorry, it should be $6,200 for 2014 standard deduction (single)
$6,200 is the earned income threshold for single dependents. A lower threshold applies to unearned income.
So if I understand this correctly, the standard deduction applies for the purpose of determining if student has to file a rax return if they have earnings from work and unearned taxable scholarship income. But when it comes to determining taxable income in that case it does not apply? So what is the threshold for unearned income, $2,000? After that the kiddie tax applies?
Taxable scholarships/grants are earned income for the purposes of filing requirements and the standard deduction per IRS Pub 501. They are unearned income for the purpose of the kiddie tax, form 8615, per the form 8615 instructions.
If all interest, dividends and other “wholly” unearned income is less than $350 and then if total income including taxable scholarships/grants is less than $6200, the student isn’t required to file. If total income in that scenario is over $6200, the student should still get the $6200 standard deduction and the $2000 threshold before the kiddie tax kicks in. Though other “wholly” unearned income would be part of the $2000 threshold.
That’s my understanding. It may be hard to follow but I tried my best.
@annoyingdad, thank you. It makes sense to me.